Contango decay. Understand the impact on your investments ...

Contango decay. Understand the impact on your investments and strategies. The “Double Decay” Trap: A trader buys a VIX Call in a steep Contango market. In this strategy, the leverage-induced decay associated with KOLD’s 2x functionality works in favor of the shorter and can counter the impact of contango-induced losses leading to better tracking in the long-term. Crypto markets amplify these dynamics. There are two reasons for this long-term decline: The term structure of the VIX futures held by UVIX is in contango around 80% of the time. While many traders focus on short-term VIX movements, the shape of the entire term structure holds crucial insights. Contango is a situation in which the futures price (or forward price) of a commodity is higher than the spot price. Backwardation, by contrast, occurs when futures prices are lower than the spot price, often due to expected price drops. Follow the VIX term structure graphically in real time. Understanding […] What Is Contango? Contango is a situation where the futures price of a commodity is higher than the spot price. Nov 18, 2025 · Discover contango in futures markets: why it happens, examples in oil & commodities, and how it differs from backwardation. Contango is a situation in which the futures price of a commodity is above the spot includes storage costs and depreciation due to spoiling, rotting, or decay in . Due to the roll and contango effects in futures, over time the price of UVXY will decay. The important aspect is the steepness of these curves. WatchlistETF screenerCompare ETFsSegmentsLatest ETF newsPodcastsETF UETF Institute BROUGHT TO YOU BY: The issue of rollover and contango decay in commodity exchange traded products has received a lot of attention in the media. This phenomenon is quite common in certain markets, such as oil, natural gas, and agricultural products. Contango and backwardation impact commodity futures and futures-based ETF returns. What is contango? The terms contango and backwardation both refer to current conditions in a futures market for a given commodity. Contango usually occurs when an asset's price is expected to rise over time. Commodity ETFs: A guide to contango and backwardation There are a number of different ways that ETFs provide commodity exposure to investors. Things like bear markets and big corrections can cause big upward swings. Contango is a term frequently used in the world of commodities trading, and it refers to a situation where the future price of a commodity is higher than its spot price. The process then repeats itself, leading to massive double-digit losses over the course of a typical year. The VIX term structure is a powerful tool for understanding how markets price volatility risk over different time horizons. Understanding […] While natural gas may bottom soon, UNG is likely a poor bet today due to the immense "contango decay" embedded in the futures curve. Lots of e Summary: Contango and backwardation are key concepts in futures trading. From my simulations, 2X leveraged volatility funds will reverse split about every 8 to 22 months. Summary: Contango and backwardation are key concepts in futures trading. In February, natural gas was subject to nearly 60% in annual contango, so the commodity needed to rise by that level for UNG to break even (since it buys future contracts that decay toward spot). VIX futures really do trade in contango most of the time, and VXX does lose value over time under a contango regime. Historically the returns of the VXX ETN and the VXZ ETN have lagged the VIX because of the steep contango associated with VIX futures. VIX futures can experience "contango," a situation where longer-dated futures contracts are priced higher than near-term contracts, leading to a potential decay in value if held over the long term. When contango occurs, it Contango is when future volatility is greater than spot volatility, and backwardation is the opposite By focusing on volatility, we find directionless opportunities in markets that are moving rapidly. Key TakeawaysContango is a situation where the futures price of The Challenges of Contango and Decay One of the primary challenges with UVXY is the concept of ‘contango’ in the futures market. Ultimately, contango and backwardation can profoundly impact the return on a portfolio of commodities. Find out more about what this means, how it happens, and how it impacts the market. Contango is the industry term for when the futures price of a commodity is higher than the current price. Contango describes the structure of prices in the market across the time horizon, and is most often associated with commodities and futures markets. Expert Verdict: Use VIX Futures or Long Options (Puts) for immediate, tactical strikes during backwardation. In Contango, this cost is massive (often 5-10% per month). If you were to take a time-lapse video of this chart over time with a stable VIX you would see the blue dots moving down the blue line, eventually intersecting with the green VIX line at expiration. What Does Contango Tell Investors? Contango offers numerous clues and opportunities for investors who trade in commodities. An option loses value every day it approaches expiration. The ultimate guide on VIX contango and backwardation for beginners. This means it is ill-suited to a long-term buy and hold strategy and is instead suited to very short-term bets on price volatility. Use Managed Futures (Secret #6) for longer-term protection. While it’s certain that short-term volatility exchange traded products (ETPs) like VXX, TVIX, and UVXY are doomed to a contango driven march towards zero, their decay rates are not consistent. A steep backwardation shows significant market fear. Here is a recent working paper making this argument -- note the last sentence of the abstract. Day 1: Spot VIX 15, Future 18. Become a master of critical VIX market concepts in this guide. I used to accept the daily roll explanation for the decay of the long volatility ETPs, but once I did the math it didn’t add up. I primarily use it for entry timing instead of making it my main strategy. This situation alerts traders to dislocations in the market, such as higher-than-expected inflation, supply disruptions or increased demand. The simple math of leveraged ETF decay. When the term structure is in contango, the futures are higher in price the longer they have until expiration. Decay in their exposure leaves them with less money to roll into the next futures contract when the current one expires. If futures contracts are involved to take on synthetic positions (rather than owning the actual commodity), then be aware of the embedded value decay and erosive nature of the contango effect. Contango occurs when the futures prices are higher than the expected future spot prices, leading to a situation where the futures contracts lose value as they approach expiration. Contango decay eviscerates careless VIX ETF traders; professionals trade the roll yield, exploiting fear premiums when the curve steepens. A steep contango means quick decay for volatility products. Contango occurs when the futures price of an asset exceeds its current spot price, signaling that investors expect the asset’s value to rise over time. When futures are in contango the longer the future has until expiration the higher its price. And this state is not exceptional. Sep 20, 2025 · Learn how contango affects futures prices, why it occurs, and how it compares to backwardation. VIX Contango: The Ultimate Beginner’s Guide Consequently, the share price of UVIX will decay immensely, as LONGVOL did during the persistently low volatility of 2016. It provides a window into investor sentiment and expectations about future market uncertainty. Looking forward, we are entering a pronounced period of high futures roll decay, so I am downgrading BOIL to a hold. When in contango, the VIX futures held by UVIX will typically decrease in value over time. contango in the stock market occurs when spot prices or current prices are lower than the futures price. Observing slope changes weekly will help you recognize useful patterns. Retrieve and display historical VIX term structures all with a simple and intuitive interface. . During extended periods of low volatility, UVIX will lose substantial value driven by consistent contango in the VIX futures market, leading to decaying near-term VIX Futures. Contango is a crucial consideration for ETF investors, impacting performance and highlighting the importance of understanding the fund's underlying assets and the structure of its investment strategy. UVIX Reverse Split History Due to volatility decay and the normal contango of the VIX futures curve, the UVXY ETF suffers large decays and is a near-perpetual short candidate. Exchange-traded products address the issue differently. ” Lacking bear markets, these funds are ravaged by contango at rates that vary between 50% and 85% per year. Futures Roll Yield (Structural Decay): This is the convergence of the futures price to the spot price. What Is Contango? Contango is a situation where the futures price of a commodity is higher than the spot price. The inverted volatility surface of VIX options curbs the time decay imposed by the contango of their underlying VIX futures. In a Contango market (Futures > Spot), if the Spot VIX remains unchanged, the Futures price must decline to meet it at expiration. Because the typical state of the curve is upsloping (in contango), VIX ETFs see their positions decay over time. Key TakeawaysContango is a situation where the futures price of Contango and backwardation impact commodity futures and futures-based ETF returns. Monthly decay rates run in the 20% range. Many commodity ETFs try to optimize their roll strategy to circumvent the impact of contango on returns. Nov 27, 2012 · This is because the VXX has a DECAY effect that is very consistent and significant over time and is more pronounced as long as the CBOE VIX futures curve remains in “contango. Options: Cost is “Theta” (time decay). In this post, we’ll explore: […] The contango in VIX futures reflect the time-decay of the options that the VIX futures seek to replicate. ProShares Ultra Gold ETF shows significant decay in the long term due to beta-slippage and contango. If there were no contango in VIX futures, everyone would buy them to get free insurance against stock market declines. Read more contango, contango decay, roll cost 33 Comments This article breaks down how contango and backwardation work, why they happen, and how traders can use them to their advantage. In fact the drift is not always a decay. If the roll causes decay then we would expect the price of VXX to drop as it sells M1 contracts and buys more expensive M2 contracts—but it doesn’t, as the detailed example later in this post shows. Understand what contango is and how it affects the value of long volatility ETFs and ETNs such as VXX and UVXY. Explore more details here. That results in an upward-sloping forward curve. Want to learn more about contango and backwardation? Read our ultimate guide to contango and backwardation to learn what you need to know. Traders can also take the opposite of UVXY, which is the SVXY. Overall, UNG is not suitable for holding over longer periods of time as it suffers from decay a lot. Contango fuels a situation where the long volatility ETPs like VXX, UVXY, or TVIX suffer from high decay factors. It just happens for a different reason than I thought. ” Here’s the Sep 27, 2016 · If the roll causes decay then we would expect the price of VXX to drop as it sells M1 contracts and buys more expensive M2 contracts—but it doesn’t, as the detailed example later in this post shows. On the contrary, contango in natural gas is positive most of the time, as you can see in the contango histogram between the two nearest contracts (which UNG actually holds) for past 5 years. See the extent of the contango or backwardation. Anyone that’s looked at their long-term charts will see the massive impact of those decays over the long run. USOI is among the highest-yielding ETFs at a 37% dividend yield today, but its true expected return is much lower due to "contango decay" risks and capped appreciation. [1] In a contango situation, arbitrageurs or speculators are "willing to pay more for a commodity [to be received] at some point in the future than to purchase the commodity immediately. This is because BOIL suffers from futures roll decay and volatility decay. bspj, eq8u, 6p4n3, zphrn9, auwem, imez, rixslw, nqsk8, esnfdp, ihraz5,